Noted for May 12, 2013

Ryan Avent:Bubbles: Stability through instability: "THIS spring, the economics commentariat is discussing the relationship between monetary policy and financial stability…. Jeremy Stein, a new addition to the Federal Reserve Board of Governors, has been making speeches that provide an intellectual skeleton to which the more gut-driven critics of excess can cling…. Easy monetary policy, and especially unconventional policy that lowers rates all along the yield curve, generates a sort of unnatural pressure for financial risk-taking. Regulatory tools may be able to rein in some of that excess, but the only way to make sure you've gotten all the bubbles that might be hiding in the cracks is to raise interest rates. Tighter monetary policy might have a cost, but if it prevents financial excess it may avoid even greater costs…. First, within the argument to tighten policy in order to prevent big economic losses there are several logical links that look pretty weak…. You would first wish to establish that there is a financial bubble…. Next, it should be established that anything needs to be done about the bubble. Third, and this is a big one, it should be established that regulatory policy is unable to bring credit indicators back to desired levels…. Ny second comment follows from the first. A bubble is a surge in prices that comes to an end. But we must, must remember that a good way to bring a bubble to an end is to disemploy people and cause their incomes to grow more slowly than they had anticipated…. I see… a central bank that worries about financial excess but is uncomfortable using regulatory tools to address it…. And I see, second, a central bank tendancy to: 1) reduce nominal output growth to rein in asset-price increases, 2) fail to return nominal output back to trend out, for reasons of inflation-aversion or something else, and 3) use the financial mess that results from tight policy as proof that there was a bubble that needed popping."

Jonathan Chait:The Facts Are In and Paul Ryan Is Wrong: "Two such developments have come together recently…. The first is the collapse of intellectual support for the notion that immediate austerity can boost economic growth. The second is a growing consensus that health-care-cost inflation is slowing for deep structural reasons, rather than having undergone a mere temporary dip from the recession…. They blow to smithereens the intellectual foundations of the Obama-era Republican policy agenda…. It is of course unfair to judge the merits of an analysis solely by the rhetoric of its politicians…. The deeper expression of the Ryan worldview comes from Yuval Levin…. This conflation of short- and medium-term problems — of annual deficits with retirement liabilities, of sluggish growth with the burden of debt, of the Obama agenda with the broader social-democratic project — is in one sense an error, of course…. [But] this became the basis for the Republican view that deficit reduction could not be delayed and must be undertaken immediately, and that radical new tactics, like threatening financial chaos through defaulting on the debt, were a justified response to an emergency that did not lay over the horizon but was already upon us…. At first, the sharp slowdown in health-care costs was assumed to have happened because the recession is making people cut back on their medical care. Levin has clung stubbornly to this interpretation. But as the trend has persisted, and undergone deeper study, a consensus is emerging that this is not the case at all."

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Noted for May 12, 2013

Ryan Avent:Bubbles: Stability through instability: "THIS spring, the economics commentariat is discussing the relationship between monetary policy and financial stability…. Jeremy Stein, a new addition to the Federal Reserve Board of Governors, has been making speeches that provide an intellectual skeleton to which the more gut-driven critics of excess can cling…. Easy monetary policy, and especially unconventional policy that lowers rates all along the yield curve, generates a sort of unnatural pressure for financial risk-taking. Regulatory tools may be able to rein in some of that excess, but the only way to make sure you've gotten all the bubbles that might be hiding in the cracks is to raise interest rates. Tighter monetary policy might have a cost, but if it prevents financial excess it may avoid even greater costs…. First, within the argument to tighten policy in order to prevent big economic losses there are several logical links that look pretty weak…. You would first wish to establish that there is a financial bubble…. Next, it should be established that anything needs to be done about the bubble. Third, and this is a big one, it should be established that regulatory policy is unable to bring credit indicators back to desired levels…. Ny second comment follows from the first. A bubble is a surge in prices that comes to an end. But we must, must remember that a good way to bring a bubble to an end is to disemploy people and cause their incomes to grow more slowly than they had anticipated…. I see… a central bank that worries about financial excess but is uncomfortable using regulatory tools to address it…. And I see, second, a central bank tendancy to: 1) reduce nominal output growth to rein in asset-price increases, 2) fail to return nominal output back to trend out, for reasons of inflation-aversion or something else, and 3) use the financial mess that results from tight policy as proof that there was a bubble that needed popping."

Jonathan Chait:The Facts Are In and Paul Ryan Is Wrong: "Two such developments have come together recently…. The first is the collapse of intellectual support for the notion that immediate austerity can boost economic growth. The second is a growing consensus that health-care-cost inflation is slowing for deep structural reasons, rather than having undergone a mere temporary dip from the recession…. They blow to smithereens the intellectual foundations of the Obama-era Republican policy agenda…. It is of course unfair to judge the merits of an analysis solely by the rhetoric of its politicians…. The deeper expression of the Ryan worldview comes from Yuval Levin…. This conflation of short- and medium-term problems — of annual deficits with retirement liabilities, of sluggish growth with the burden of debt, of the Obama agenda with the broader social-democratic project — is in one sense an error, of course…. [But] this became the basis for the Republican view that deficit reduction could not be delayed and must be undertaken immediately, and that radical new tactics, like threatening financial chaos through defaulting on the debt, were a justified response to an emergency that did not lay over the horizon but was already upon us…. At first, the sharp slowdown in health-care costs was assumed to have happened because the recession is making people cut back on their medical care. Levin has clung stubbornly to this interpretation. But as the trend has persisted, and undergone deeper study, a consensus is emerging that this is not the case at all."